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Spotlight
Fiscal Consolidation in
Germany: Gain without
Pain?
Gain without pain
Recent contributions highlight the fact that public finances in Germany are currently benefiting from various extraordinary factors that are predominantly related to temporarily low expenditure and windfall
profits. For instance, low interest expenditure on
German government debt, the favourable labour market conditions during an extraordinary cyclical situation, low expenditure on government investment, as
well as low expenditure on monetary transfers as a result of a temporarily supporting demographic situation (See also Breuer 2012; Boysen-Hogrefe 2013). It
is possible to assess the quantitative effect of these arguments with a view to the general government budget in Germany.
Christian Breuer*
The mystery of fiscal consolidation
10 years ago, when Angela Merkel came to power,
Germany was seen as the ‘sick man of Europe’ (see
Sinn 2007; Dustmann et al. 2014). In 2005, when other countries like Spain achieved fiscal surpluses and
public debt in Spain stagnated at a level of 40 percent
per GDP, Germany missed the Maastricht fiscal tar-
shows a structural surplus of approximately one per-
Since 2002, the German government has reduced its
deficit by approximately 5 percentage points as a ratio
to GDP. This corresponds to a slow, but long-lasting
consolidation of 0.4 percentage points per year. It is
conceivable that this improvement is related to cyclical
factors, however, the cyclically-adjusted budget balance also improved by 5 percentage points (Figure 1).1
centage point of GDP (Figure 1). In 2014 the
1
get to keep its deficit at a level of 3 percent of GDP
for five consecutive years. Recently, with a large share
of the Eurozone stuck in a fiscal crisis, Germany balanced its budget at the general government level for
the third time since 2012 and in 2014 its government
Standard methods to adjust for cyclical effects control for the effect of the output gap on the government budget, however, the output
gap is estimated to be relatively low in 2002 as well as in 2014. In this
article I use the strategy proposed by Girouard and André (2005) and
Mourre et al. (2013) to adjust for cyclical effects. Estimations for potential output are obtained from BMWI/BMF (2015). Structural expenditures are corrected for one-offs in 1995, 2000, and 2010.
German finance minister Wolfgang Schäuble even
reported the first balanced federal budget since 1969.
The suddenly balanced German government budget
in the midst of the European fiscal crisis was surprising from the
Figure 1
point of view of other countries
General government budget balance as a ratio to GDP
that are struggling with excessive
deficits and debt levels. Other
European countries have not
been able to cut deficits even with
harsh consolidation measures
and in cases where they have attempted to do so, GDP has de-
2
0
-2
-4
creased, leading to a vicious cir-
-6
cle of increasing debt to GDP ra-
-8
tios. How did Germany consolidate its public finance? Did
Angela Merkel enact harsh consolidation measures?
*
Ifo Institute
CESifo Forum 2/2015 (June)
%
-10
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Government budget balance
Cyclically-adjusted government budget balance, adjusted for one-offs
Source: Destatis; own calculations.
50
2013
Spotlight
Figure 2
Cyclically-adjusted government revenue and expenditure
as a ratio to GDP
50
%
that cyclically adjusted total government revenues have increased
only slightly (by approximately
1 percent of GDP since 2002).
48
The predominant share of fiscal
consolidation is related to de46
creasing government expenditure.
Figure 4 shows the structural
44
components of government expenditure as a ratio to potential
42
GDP. Monetary transfers in par40
ticular decreased from a level of
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
18 percent of GDP in 2002 to
Cyclically-adjusted government revenue
15.3 percent in 2014, which can be
Structural government expenditure
traced back to reforms of the welSource: Destatis; own calculations.
fare system made during the period 2001 and 2005. These reforms were constructed to
A number of studies suggest that the German governreduce expenditure on long-term unemployment (over
ment profited from the reduced expenditure on interone year) and pension benefits.3
est payments on its government debt. Interest expenditure on German government debt decreased from approximately 3 percentage points in 2002 to 1.8 percent
in 2014, while debt per GDP increased from 59 to 75
percent of GDP. This bird’s eye view suggests that – in
comparison to the pre-crisis interest rates in 2002 – the
government budget balance improved by approximately 1.5–2 percentage points of GDP or 45 to 60
billion euros. Nevertheless, interest rates are only one
contributing factor and may explain only a share of
the reduction in structural government deficits.2
It is obvious that the reduction in social spending between 2002 and 2014 is influenced by these reforms.
For example, the cuts in unemployment benefits for
the long-term unemployed (above one year) lead to an
immediate reduction in transfer payments and the
subsequent reduction in unemployment decreased social expenditure once again.
The reforms made in the pension system have also
been effective in the long-run.4 After the reforms, the
Reforms of the welfare system
See Breuer, Gottschalk and Ivanova (2011) for a discussion of the
fiscal consolidation program in 2003.
4
A number of reforms were enacted during 2001 and 2007, see e.g.
the introduction of a ‘sustainability factor’, the taxation of pension
benefits, the introduction of the ‘Riester factor’, as well as the increase
in the regular pension age.
3
The structural primary surplus, excluding interest expenditure and controlled for cyclical effects, has also
improved by approximately 4 perFigure 3
centage points. It changed from a
Government revenue as a ratio to GDP
deficit of 1.1 percent of GDP in
%
2002 into a surplus of 2.9 percent
20
in 2014. The predominant share
of this structural consolidation is
15
related to expenditure, rather
than revenue (Figure 2). On the
10
one hand, tax revenue increased
slightly, particularly the ratio of
direct taxes per GDP increased
5
since 2010, however, the ratio of
social insurance contributions per
0
GDP decreased (Figure 3), so
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
See also Boysen-Hogrefe (2012); and
Breuer et al. (2012) on how decreasing interest rates affect federal interest expenditures in Germany.
2
Indirect taxes
Net social contributions
2011
2013
Direct taxes
Other government revenue
Source: Destatis; own calculations.
51
CESifo Forum 2/2015 (June)
Spotlight
Figure 4
Structural government expenditure as a ratio to
potential GDP
%
20
Monetary social transfers
Compensation of employees
15
Social transfers in kind
Intermediate consumption
10
Gross capital formation
Property income paid
5
Other government
expenditure
0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: Destatis; own calculations.
Figure 5
Annual adjustment of pension benefits (inflation-adjusted)
1.5
%
1.0
0.5
0.0
-0.5
adjustments of nominal pension
benefits did not exceed inflation
rates for a long time, leading to a
negative adjustment of real pension benefits for ten consecutive
years (Figure 5).5 Beyond these
discretionary measures other factors might matter to the recent
development of pension benefits,
like, for example, the cyclical situation and the weak development
of wages and salaries since – according to the German pension
formula – the nominal adjustment of pensions is based on the
development of wages and salaries during the preceding years.
As a result, pension benefits decreased during 2002 and 2015 by
1.2 percentage points as a ratio to
potential GDP, while the old-age
dependency ratio as a natural
proxy for pensions increased by
3½ percent (as a ratio to total
population), pointing to a large
scale cut in average pensions during this period (Figure 6).
-1.0
-1.5
Concluding remarks
-2.0
1998
2000
2002
2004
2006
2008
2010
2012
2014
Source: Deutsche Rentenversicherung; Eurostat; own calculations.
Figure 6
Demographic change and pension benefits as a ratio to GDP
25
%
20
15
10
5
0
1991
1993
1995
1997
1999
2001
2003
Population share 65 and above
2005
2007
2009
Source: Destatis; Eurostat; own calculations.
CESifo Forum 2/2015 (June)
2011
Pension benefits (total)
52
2013
Different factors contributed to
the recent favorable state of public finance in Germany. Firstly,
low interest rates extensively contributed to the improvement in
the German government budget.
Property income paid by the
German general government decreased by approximately 1½ to
2 percent of GDP or 45 to 60 billion euros per year. Secondly, beyond beneficial interest rates, a
substantial share of recent fiscal
consolidation in Germany is
achieved by reductions in monetary social transfers that are related to reforms made in the period
2001 to 2005. Altogether, moneThe inflation-adjusted increase in pension
benefits is the nominal increase in July of
year t net of the annual inflation rate in the
previous year t-1.
5
Spotlight
tary social transfers decreased by approximately 3 percentage points as a ratio to GDP or by 80 billion euros. It is inappropriate to assume that Germany did
not enact reforms at all, even though, the reforms
made in Germany were implemented a long time ago.
These reforms have a few similarities with the recent
consolidation episodes in Southern Europe. For example, the reforms were accompanied by a political
crisis in which the governing social democratic party
faced an inner-party conflict, a new left-wing party
was established, and the prematurely arranged election in 2005 led to a deselection of the red-green cabinet of chancellor Schröder. Angela Merkel benefited
from the loss of the social democrats and in 2005 she
received a narrow majority in the new established
grand coalition. In this sense Angela Merkel can be
regarded as a product rather than an executer of
austerity.
References
BMWi/BMF (2015), “Gesamtwirtschaftliches Produktionspotenzial
und
Konjunkturkomponenten”,
Frühjahrsprojektion
der
Bundesregierung, 22 April 2015.
Boysen-Hogrefe, J. (2012), “Die Zinslast des Bundes in der
Schuldenkrise: Wie lukrativ ist der ‘sichere Hafen’”, Perspektiven der
Wirtschaftspolitik 13, 81–91.
Boysen-Hogrefe, J. (2013), “Wie der Staat seit 2010 konsolidiert hat”,
Kiel Policy Brief 62.
Breuer, C., J. Gottschalk and A. Ivanova (2011) “Fiscal Adjustment
Attempts with and without Reforms: The Case of Germany“, in:
Mauro. P. (ed.), Chipping Away at Public Debt – Sources of Failure and
Keys to Success in Fiscal Adjustment, Washington DC: IMF.
Breuer, C. (2012), “Strukturelle Konsolidierung ohne Finanzpolitik”,
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Breuer, C., D. Mannfeld and N. Potrafke (2012), “Die Zinslast des
Bundes”, ifo Schnelldienst 65(12), 47–50.
Dustmann, C., B. Fitzenberger, U. Schönberg and A. Spitz-Oener
(2014), “From Sick Man of Europe to Economic Superstar: Germany’s
Resurgent Economy”, Journal of Economic Perspectives 28, 167–188.
Girouard, N. and C. André (2005), Measuring Cyclically-adjusted
Budget Balances for OECD Countries, OECD Economics Department
Working Papers 434.
Mourre, G., G.-M. Ibasoiu, D. Paternoster and M. Salto (2013), The
Cyclically-adjusted Budget Balance Used in the EU Fiscal Framework:
An Update, European Commission Economic Papers 478.
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